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Should I use my cash buffer?

Discussion in 'Money Management' started by dinky, 8th Oct, 2006.

  1. dinky

    dinky Member

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    Hi guys.

    Currently I have a car loan (bad debt) for 20k but have also managed to save 20k as a cash buffer. Thinking what's the better way to get rid of this debt before I start to execute my investment plan (at least have designed a very rudimentary one). so I have these three options so far and I would like to know what your opinions/comments are in this regarding (I am not looking for specific advise just for general comments and opinions):

    1)Pay off the car loan with the cash buffer.
    2)Pay 10k of the car loan and keep 10k as a cash buffer.
    3)Keep the cash buffer and put all the spare dollars into the car loan.

    Thanks,

    Dinky
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    What interest rate are you paying on the car loan ?

    Are you likely to need the cash ?

    How much are your monthly payments on the loan (P&I) ?

    How soon will you be able to build up a new cash buffer with the cashflow you free up after paying off the loan ?

    I think you might be better off long term paying down that debt now and freeing up the cashflow - then get your buffer back and start investing more :D

    Of course, if you really need that buffer on hand in the short term, you might need a different approach.
     
  3. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    Taking into account that I have no idea what you can do, given the small amount of info in the post, I would suggest no. 2. It's a good each way bet. A buffer is there for a reason - it's not investment money, it's not pay back the loan money, it's emergency money.

    Buffers are there for the 'just in case'. Like 'It's good that I have this buffer 'just in case' I get hit by a bus' or 'It's good that I have this buffer 'just in case' I lose my job suddenly and am unable to find work for three months'.

    Use half to pay down the loan and pay off the rest as quickly as possible then get the buffer back up to a level that you're comfortable with.

    Mark
     
  4. dinky

    dinky Member

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    Thanks Sim and Mark for your response.

    9.3%

    I don't know. Hopefully no, but I think the cash buffer it's like insurance, you pay for something you hope never need to use.

    $470 monthly

    I read one article written by Simon Hampel “How To Save Effectively” that was very helpful in order to decide what to do. So, this is the plan to get rid of the car loan and start investing:

    1)Pay down 10k to the car loan, so the monthly payments will be $262, which free up $208 more to reduce the debt.
    2)keep my cash buffer in 10k (If something really bad happen I can sell the car).
    3)Continue to pay the $470 + $800 (which I save monthly) and reduce the car loan, so in 10 month time the car loan will be paid off.
    4)Add $1270 monthly to the cash buffer until I get to 20K again (8 months).
    5)Revalue my home in 18 months time (hopefully it will grow in value), get a line of credit and use it as a deposit for my first IP and use the $1270 to service the loan.
    6)Keep the car for at least 7 years. Wow, what a pain it's a car loan.

    Please feel free to express your comments.

    Cheers,

    Dinky
     
  5. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Thanks - I'm glad you found it useful :D

    Sounds like a good plan to me - keeps some of the buffer around for emergencies, and makes a big dent in the loan repayments, knocking it off much more quickly, and getting you closer to buying an IP a lot sooner !!

    Anyone else have any comments or suggestions ?
     
  6. Leandro

    Leandro Well-Known Member

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    Hey dinky,

    Is the car loan facilty fixed or variable? Is it a simple bank loan, or is it a lease or commercial hire purchase?

    Just wondering, because in some of these situations i.e. a fixed interest commercial hire purchase, even if you pay down the loan with a lump sum you will still need to pay the full interest amount as it has been calculated before you started regardless of early payments.
     
  7. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    I agree with all of that, except I would be getting the PPOR revalued twelve months after the purchase date. No point in waiting 18 months when you can do it at 12 months.

    Mark
     
  8. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think it depends on the situation - you need to look at the cost of refinancing versus your returns in doing so.

    I'm not in favour of refinancing every year just for the sake of it - especially if growth has been modest.

    It also depends on how you do it - if you can get a "top up" loan through your existing lender, it is generally very cheap to do so, and may well be worth doing earlier ... depends on how much the valuation and other expenses costs you I guess.

    If you refinance through another lender, it is likely to be much more expensive. Usually no need to do that though if you only have one property ... I typically need to move lenders when I've run out of LMI capacity through my existing lenders because of other property holdings.
     
  9. dinky

    dinky Member

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    It's a secured personal loan with variable interest rate and no early repayment fees.

    I am (and will continue) monitoring the market in my suburb, if there is an increase of the sale price of similar properties I will revaluate sooner. However, I can't see capital gains in my area in the short term (hopefully time will prove I am wrong).

    Cheers,

    Dinky
     
  10. Leandro

    Leandro Well-Known Member

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    Excellent, then your plan sounds good.
     
  11. Saskatoon

    Saskatoon Well-Known Member

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    Hi dinky
    what about using the cash to pay off the car loan - no more lost capital in interest payments. Start a new cash buffer with the former loan payments.
    For emergencies have an unused credit card as no cost insurance unless you actually draw on it. Any high interest charge will only be for a month or two, and should be less than your long-term car loan interest (over 4 years?). Then, if necessary, you could sell the car to pay back the credit card! As your cash buffer increases again you can reduce the credit limit on the unused (!) card.
    What emergency is likely to need $20K cash?
    This is an option, not advice - follows from Sim's first post in reply.
    Keen to hear other's thoughts!
    Terry
     
  12. Mark Laszczuk

    Mark Laszczuk Well-Known Member

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    - being involved in a serious accident
    - losing your job and not being able to find work for 3 months or more
    - your house burning down
    - a tree falling on your car
    - something like this happening to a family member and they need some financial help from you
    - cancer

    Shall I keep going? Think it wont happen to you? Tell that to the people it's happened to.

    Mark
     
  13. MichaelWhyte

    MichaelWhyte Well-Known Member

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    Hi Dinky,

    Without sounding unfair, to my way of thinking you don't actually have a cash buffer. What you have is some bad debt which is offset by your cash holdings. I certainly wouldn't be considering investing any of that cash until you have completely cleared your bad debt and then built a cash buffer. Whether you pay off that debt now and then diligently work to build a true cash buffer is another question altogether. Personally, I would pay the car off immediately. I'd also look at any other loans you have like consumer credit and work to clear all these to zero as well. Then save yourself a decent cash deposit and only then consider how to go about investing it in good assets to accumulate your wealth.

    I'm sorry if that comes across as negative, but its the truth as I see it. You've done really well to save that $20K, and I'm sure once you clear all your bad debt you'll be able to even quicker save a nice big cash deposit to go investing with.

    Good luck,
    Michael.
     
  14. seeking_the_rich_dad

    seeking_the_rich_dad Member

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    All good advice given so far. So Dinky, the overriding message is to pay off your debt. It makes the most sense. I know its hard to dip into your savings for such a thing, but when you break it down, the interest on your loan is higher then the interest earned on your savings...your losing money effectively.

    You know, the fact that your seeking advice on how to improve financially, is the right step already.


    Sim, you said that refinancing for refinance sake is not a good thing. Well said and I agree. But to get the bank to re-value, does not need (I could be wrong) to involve any sort of refinance. That's what I think Mark was alluding to --> simply re-value to see how much equity you have, not refinance. Apples and Custard Apples sort of thing. Btw, I just made that up....tehehe

    Gee Gee's

    PS....for all you Somersoft folk, its grubar30 here. New nick, new forum, positive people....CHA CHING!.....:D
     
  15. voigtstr

    voigtstr Well-Known Member

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    I would go 2)

    Paying half of the car now will reduce the interest payments considerably.
    Keeping 10k in cash for emergencies makes sense (I guess I'm one paycheck from disaster myself!). the 10k cash would be good in something like ING Direct where you are still getting ok interest, and can transfer it out after a day.

    The quicker the loan is out of the way, the more money you will have monthly to put into investments.
     
  16. Glebe

    Glebe Well-Known Member

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    It's been 3 months.. I wonder if Dinky has paid off the loan now. I hope so.
     
  17. Saskatoon

    Saskatoon Well-Known Member

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    Hi Mark
    just read your comment about emergencies. You are correct [again :) ], but the cases you mentioned would not be a problem with the usual insurances on life, house and car, and perhaps health. With no consumer debt dinky would find it easier to take out an emergency loan if needed. The (previously unused) credit card could have up to 55 days interest free, giving time to organise things.
    Terry
     
  18. dinky

    dinky Member

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    It's been 7 month since my initial post, now it's a good time for an update on my current situation.

    This is what I've done so far:
    1-) I put $10K into the car loan (but still pay the same $470 each month, which has helped to reduce the debt down to $8K)

    2-) kept $10K in a NAB iSaver (online saving account).

    3-) I didn't have a Will (crazy I know), so I instructed my solicitor to create one.

    4-) I checked the terms of my income protection insurance and I am happy with them. 75% of my income until I reach 60 years old and 60 days waiting period.

    5-) I continued saving and I have now $16K in the NAB iSaver account.

    Another things to do ASAP:
    1-) I checked my life insurance cover and it's not enough to cover the debts, so I have to increase the cover.

    2-) I don't have Trauma cover, so I have to get one through my super annuation fund.

    3-) Continue saving and when the savings account reach $20K, I will pay in full the outstanding debt of the car loan. (This will be in 5-6 months time)

    4-) Revalue my PPOR to see if I have any equity available to use it as a deposit for one IP.

    As you can see I am just starting my journey, but I have learnt so much in the last year, and now I am looking forward to use that knowledge to bring financial independence to my family.

    Thanks a lot for your feedbak. It's been great :)

    Cheers,

    Dinky
     
  19. Nigel Ward

    Nigel Ward Team InvestEd

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    Well done Dinky!

    I find one of the really gratifying aspects of being involved in the InvestEd community is that through sharing financial education we can all help each other to make positive changes in our financial lives. :)

    Gee that sounds all touchy feely doesn't it :rolleyes:

    ...and we can all make a heap of $ from our investments :D ...ahh that's better. ;)

    Cheers
    N